Frozen Funds Create Customer Headaches

Yule Edwards

What triggers customer funds being frozen and internal investigations, and can customers avoid these issues?

As banks continue to tighten processes and policies in accordance with stringent international anti-money laundering and anti-terrorism funding laws, the line between protecting clients’ interests and annoying them is blurred.

Banks are forced to implement automatic alerts on large transactions, which can then result in funds being frozen while the legitimacy of the transaction is investigated.

“If we secure funds on an account, we play open cards [with our customers]. We’ll block the cards on that account and we would then advise the client of what’s happening,” says Gerda Ferreira, head of Group Forensic Services at Nedbank.

Communication is the key in these situations and can turn annoyance into gratitude once clients understand the reasons behind frozen funds. Smangele Nhlapo, owner of interior design business DecoFile, relates how her bank let her down by freezing funds without any explanation. For most small business owners, cash flow is a constant worry. Late- and non-payers are behind the early failure of so many small businesses – they simply cannot sustain negative cash flow until they have some capital accumulated.

One Friday, Smangele was alerted via SMS about a hefty deposit into her FNB business account from one of her clients. “I immediately got onto the internet to verify the transaction. I then sent the client a thank you and informed them that the project had kicked off and work would commence,” says Smangele.

However, on the Saturday morning, she received an SMS to say that the amount had been withdrawn – the full amount. Panic set in and she began frantically calling her bank to find out what had happened. The bank advisor told her he could see both transactions on his system, but there was no other information showing how the money had been withdrawn or from where. She was told to follow up again at a branch on the Monday, providing little comfort. The ATM only confirmed her fears – zero balance.

“I’ve had this business account for five years and such large deposits are not uncommon, yet I’ve never had any investigations like this before. There was no communication at all from the bank and the only thing I could find out eventually was that it had been a procedural forensic investigation,” she says. She was sent from one branch to another until she finally got to the bottom of the matter. The money was immediately unfrozen, but she was neither able to establish any background on why the money had been frozen nor why the notification stated that the money was withdrawn rather than frozen.

Not commenting on this specific case, Advocate Clive Pillay, Ombudsman for Banking Services (OBS), says depending on the bank and the user’s profile, a large deposit might raise a red flag. Under the Financial Intelligence Centre Act (FICA), a bank is obliged to place a hold on deposits of R50 000 and over to check their authenticity. “This is done to curb money laundering and prevent the financing of terrorist activity,” he says. “Although banks are not bound by law to communicate such issues to their clients, it would be good practice.”

Ferreira further states that banks determine their own fraud detection rules based on the nature of the risks. “If it is detected that the internet
banking credentials of a client have been compromised, the client’s profile would be blocked… In such a case, the client is contacted and advised of the rationale behind the inconvenience caused, she says. A careful balance has to be maintained between inconveniencing the client and preventing money from getting ‘lost’.

Another trigger for investigation would be a disputed transaction, says Ferreira. “The depositor might dispute the lawfulness of the transaction or obtain a court order to prevent the disputed funds from being released to the account holder. We often see this in the online banking arena, where the proceeds of fraud are transferred to a so-called ‘emule’ account. We’ll then secure the funds, pending the outcome of the investigation or the legal process. In such a case, the account holder will still be able to transact, but will not be able to touch the secured funds.”

‘Communication is the key in these situations and can turn annoyance into gratitude once clients understand the reasons behind frozen funds.’ In a press release issued last year by the South African Reserve Bank, Financial Intelligence Centre Director Murray Michell commented: “The compliance measures imposed by the FIC Act are in place to support our financial system and to create barriers to prevent criminals from exploiting institutions such as banks. Accountable institutions have the responsibility to ensure that their systems are watertight and maintain the highest levels of integrity.”

“The danger of not fulfilling compliance measures can open the door to criminals abusing our institutions for criminal activities,” adds Ferreira. “Frozen funds inevitably create panic in the minds of banking clients, however, prompt communication allays fears greatly.” If customers are expecting large once- off deposits, alerting their bank to the incoming funds before they arrive can help to avoid frozen funds, or at least speed up any investigation necessary.